Mortgage industry analysts have been watching and waiting to see what the Federal Reserve will do—or say—next about rate cuts. They’re hedging their bets that the Fed will cut rates this year and, as an indirect result, mortgage rates will fall, too, and help revive the housing market.
Watch for coverage of today’s Fed meeting in RISMedia’s Daily News tomorrow.
Economic data plays a key role in the Fed’s timing, though. A key performance metric Fed officials and economists watch is the personal consumption expenditures (PCE) price index, which measures core inflation. PCE inflation (excluding food and energy costs) rose 0.2% in December from November’s 0.1%, and increased 2.9% from a year ago, according to data released Friday from the U.S. Commerce Department.
The annual rate of core inflation in December fell from 3.2%. That’s the lowest annual rate in nearly three years. Additionally, gross domestic product (GDP) grew at a pace of 3.3% in the fourth quarter, surpassing market expectations.
These strong economic readings pushed the 10-year Treasury yield, which mortgage rates tend to track, up to 4.14% on Friday before flattening later in the day.
Fed officials have hinted in recent speeches that cooling inflation supports the case for rate cuts—but at a more measured pace than before.
As for how those cuts will drive mortgage rates, expect “slow and steady declines,” likely in the latter half of the year, said Odeta Kushi, deputy chief economist with First American Financial.
“The Fed wants to see the long and variable lags of monetary policy so they can make their way through the economy before deciding on any rate cuts,” Kushi told RISMedia, noting that anything can happen between now and the end of the year to change the Fed’s stance. “I think that the Fed has emphasized that the path to rate cuts is highly uncertain, and they’re going to take a sort of data-driven, cautious approach.”
Several Fed officials have signaled a more cautious approach to rate cuts, dimming investors’ hopes of quick action.
During a virtual speech to the Brookings Institution on Jan. 16, Federal Reserve Governor Christopher Waller said he believes the Fed’s restrictive monetary policy is “set properly” to bring down core inflation closer to the Fed’s target of 2%. However, Waller isn’t in a rush to cut rates until inflation not only reaches the Fed target rate, but stays there for a prolonged period.
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Waller said in his speech. “In many previous cycles, which began after shocks to the economy either threatened or caused a recession, the FOMC cut rates reactively and did so quickly and often by large amounts.
“This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2 percent, I see no reason to move as quickly or cut as rapidly as in the past.”
It didn’t take long for the markets to react to Waller’s comments. The 10-year Treasury yield jumped sharply after his speech by about 30 basis points since late December and is currently hovering near 4.1% after reaching a recent low at about 3.8%.
In separate remarks earlier this month, Fed Governor Michelle Bowman, who tends to be more hawkish, said a sustained march toward the 2% inflation goal will make it more likely to lower rates to prevent the Fed’s monetary policy from being too restrictive.
“In my view, we are not yet at that point. And important upside inflation risks remain,” Bowman said in her remarks, adding that she was still willing to raise the Fed funds rate in the future if inflation stalls or ticks up again. “Restoring price stability is essential for achieving maximum employment and stable prices over the longer run.”
Mortgage industry looks to rate cuts to help spur loan activity
2023 was a painful year for housing. As mortgage rates soared near the 8% mark, existing-home sales cratered to their lowest level last year (4.09 million) since 1995 even as median home prices reached a record high of $389,800, according to data from the National Association of Realtors.
Hobbled by anemic loan originations and next-to-no refinance activity, mortgage lenders aggressively cut staff last year (especially back-office positions like underwriters and loan processors). Others merged with bigger players with strong cash positions. And some lenders threw in the towel altogether, closing up shop.
“Our data shows that your typical independent mortgage banker trimmed their employee count by more than 40% from the peak in 2021 to the most recent data points,” Mike Fratantoni, chief economist with the Mortgage Bankers Association, said in an interview with RISMedia.
Fratantoni said mortgage volume will be somewhat higher in 2024 in tandem with higher sales of new and existing homes. However, potential homebuyers—especially those with the headwind of having record-low mortgage rates—may be hesitant to make a move until rates hit a certain sweet spot.
“As we get to the low (6% range) at the end of this year and below 6% next year…that’s going to be enough to get people’s attention,” Fratantoni said.
Melissa Cohn, regional vice president of William Raveis Mortgage, points to a Fed rate cut as being a positive signal to potential homebuyers of an improving market. However, Cohn added that a notable drop in mortgage rates will likely push home prices higher due to higher demand, so buyers shouldn’t stay on the sidelines too long.
Portions of this article were drafted using an in-house natural language generation platform. The article was reviewed, fact-checked and edited by our editorial staff.
Key takeaways
National mortgage lenders provide home loans nationwide and tend to offer a variety of options, but may lack personalized service and charge higher costs.
Local mortgage lenders finance properties in a specific geographic location and often provide more personalized service, but may have limited loan options.
When choosing a lender, consider factors such as customer service, the type of loan you need and interest rates.
Deciding which mortgage lender to choose can be a daunting task, especially with the many options available. One of the key decisions to make is whether to go with a national or local lender. Here, we’ll break down the differences between national and local mortgage lenders and provide insights into which might be the best fit for you.
National vs. local mortgage lenders
National lenders
Available nationwide
Often a big bank or online lender
Typically offer a variety of mortgage options
Service might be less personalized
Local lenders
Finance mortgages within a specific geographic region
Often a community or local bank or credit union
Known for more personalized experience
Might not offer many home loan products
National lenders
A national mortgage lender works with qualified borrowers throughout the country. It might be an independent entity or a large bank providing a wide variety of home loan services. Examples of national lenders include Rocket Mortgage, Bank of America and U.S. Bank.
Pros
Extensive range of loan options
Offer mortgages to qualified individuals nationwide
More likely to have extended customer service hours and more online features
Cons
Might not get the personal touch that local lenders offer, as you’re likely to be one of many borrowers
Potential for more fees than local lenders, resulting in higher interest rates or closing costs
Emphasis on handling large volumes of loans might make them less flexible when providing tailored solutions to clients
Local lenders
Local mortgage lenders only finance home purchases within a specific geographic region. Known for their personalized service, the loan officers at these lenders have a deep understanding of the local housing market, which enables them to offer tailored loan programs for first-time homebuyers or those with complex financial circumstances. Working with a local lender means you can enjoy direct, face-to-face communication with loan officers who are part of the same community. Examples of local lenders include a credit union or community bank.
Pros
More personalized service allows you to interact directly with industry professionals and potentially get a deal more tailored to your financial situation
Loan officers have knowledge of the local housing market
Often offer lower interest rates than national lenders
Cons
Only operate within certain geographic areas, which won’t work if you’re moving from elsewhere
Might not have as diverse a range of loan options as their national counterparts
Might not have the same extended customer service hours as a national lender
National vs. local lenders: Which is right for me?
Choosing between a national and local mortgage lender depends on several key factors. If you prefer a more personal touch and insight into the local market, a local lender could be the right choice for you. However, if you value a wide range of loan options and broad accessibility, a national lender might be more suitable. To make the decision, evaluate your need for personal interaction, compare interest rates and reviews and consider the type of loan you need. Then, reach out to potential lenders to gauge their responsiveness and level of service.
Frequently asked questions
Credit unions are one option when taking out a mortgage. A credit union is a nonprofit financial institution controlled by its members and typically offers lower mortgage rates. However, at a credit union, you might only have access to a limited line of loan products, meaning you might not find exactly what you’re looking for. Plus, you’ll need to qualify for membership. That member-focused experience, though, could lead to more case-by-case flexibility that can help you with your mortgage needs.
An online mortgage lender allows you to move through the loan application process with an entirely (or almost entirely) digital experience. They often process applications in days and offer preapprovals within hours. They’re also worth considering if you want to take advantage of lower rates or fewer fees — their lack of overhead means lower costs and savings they pass on to you.
Convenience, cost and speed matter, but you might also need or want human interaction at some point in the process. With no branch locations, this can be difficult to come by with an online lender. You may or may not have an individual loan officer assigned to you and, since they could be anywhere in the country, they may be hard to reach at times. In short, they’re not ideal if you crave a face-to-face, personal touch.
Next steps on finding the best mortgage lender
When searching for the best lender — either a national lender or local lender — cost is important, but so are your needs and preferences. Some ways to narrow down your options include:
Consider your credit. If your credit score could use improving, look into lenders who have options for low-credit score borrowers or those who don’t fit the standard financial profile.
Compare quotes from multiple lenders. Studies show that shopping around for a mortgage could save you thousands.
Pay attention to how lenders communicate with you. The right lender shouldn’t be difficult to work with. The best lenders are able to answer your questions promptly, be easy to reach and keep you updated throughout the process. The right lender won’t hit you with a hard pitch, either.
Weigh the lender fees. Many lenders charge an origination fee and an application fee, to name just a few. Or they bump these charges up, to compensate for “discounts” elsewhere. Take this into account when shopping around and comparing offers.
While the dream of homeownership might seem elusive on a tight budget, the availability of low income home loans offers a beacon of hope.
These specialized loans come in handy, particularly when the obstacles of saving for a down payment loom large—a common hurdle if you’re already strapped with rent payments.
So if you’re wondering how to bridge the financial gap between renting and owning, read on to explore the various low income home loan programs that could unlock the door to your future home.
Verify your home buying eligibility. Start here
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Can I buy a house with low income?
Yes, you can buy a house with a low income by qualifying for housing assistance programs and special mortgage loans. That’s because there is no minimum income requirement to buy a house.
However, your ability to do so will depend on a variety of factors specific to your financial situation. A mortgage lender will examine your credit score, debt-to-income ratio, and down payment to determine if you qualify.
Check your mortgage eligibility. Start here
What are low income home loans?
The path to homeownership can be fraught with challenges, particularly for those with limited financial resources. Enter low income home loans—a specialized type of mortgage designed to level the playing field for buyers facing financial barriers.
Low-income mortgage programs focus on addressing the common challenges that low-income earners encounter, such as managing debt, maintaining less-than-stellar credit scores, and struggling to save for a significant down payment.
Verify your home buying eligibility. Start here
Minimal down payment requirements: One of the most daunting aspects of buying a home is accumulating a large down payment. Low income home loans often require smaller down payments, making it easier for buyers to make the initial leap.
Lenient credit criteria: Having a perfect credit score is not always feasible, especially when living on a limited income. These loans often have more flexible credit requirements, allowing for a broader range of credit histories.
Reduced costs at closing: High closing costs can be another hurdle. Low income home loan programs may offer reduced or even waived closing costs in certain circumstances.
Competitive mortgage interest rates: High interest rates can quickly make a mortgage unaffordable. Low income home loans often feature competitive interest rates, reducing long-term costs.
Lower mortgage insurance premiums: Some programs offer reduced premiums for mortgage insurance, further lowering monthly payments.
Interestingly enough, some of these programs often have income caps, essentially barring applicants who have incomes that are considered too high. This ensures that the programs benefit those who need them most.
Requirements for low income home loans
Your ability to qualify for a loan is not solely based on your income. Lenders will assess your debt-to-income (DTI) ratio, a key metric that represents your monthly debts as a percentage of your monthly income. Generally, a DTI under 35% is viewed as favorable, making you a more appealing candidate for a mortgage.
If saving a down payment is your chief concern, don’t worry; there are plenty of options that require minimal, or sometimes zero, down payments. Despite common misconceptions, a 20% down payment is not a universal requirement.
Additional Assistance
Beyond the loan itself, there are various homebuyer assistance programs that can help with the down payment and closing costs. Some of these are structured as grants that don’t require repayment, making it easier to achieve the dream of owning a home.
Navigating the complexities of mortgages and home buying can be intimidating, but low income home loans and assistance programs offer a lifeline to those who dream of owning their own home. These financial products and services are tailored to alleviate the most common obstacles, offering a viable path to homeownership for those who may have thought it was out of reach.
Low income home loans
Low income home buyers have plenty of loan options and special assistance programs to help with a home purchase. Here’s what you can expect.
Check your mortgage eligibility. Start here
Loan Type
Credit Score
Down Payment
Unique Requirements
HomeReady
Generally 620
As low as 3%
Income limits based on area, homebuyer education course required
Home Possible
Generally 660
As low as 3%
Must be primary residence, income limits may apply, can include 1-4 unit properties
Must be a qualifying service member, veteran, or eligible spouse; primary residence only
USDA Loans
Usually 640
No down payment required
Must be in a qualifying rural area, income limits apply, primary residence only
HomeReady and Home Possible mortgages
Fannie Mae’s HomeReady program and Freddie Mac’s Home Possible loan are geared toward lower-income home buyers. You need only 3% down to qualify, and there is no minimum “required contribution” from the borrower. That means the money can come from a gift, grant, or loan from an acceptable source.
Even better, the home seller can pay closing costs worth up to 3% of the purchase price. Instead of negotiating a lower sales price, try asking the seller to cover your closing costs.
Private mortgage insurance (PMI) may also be discounted for these low income home loans. You’re likely to get a lower PMI rate than borrowers with standard conventional mortgages, which could save you a lot of money from month to month.
“This is the biggest benefit,” says Jon Meyer, The Mortgage Reports loan expert and licensed mortgage loan originator. “The PMI is offered at a lower rate than with a standard conventional loan.”
Finally, Home Possible and HomeReady might make special allowances for applicants with low incomes. For instance, HomeReady lets you add income from a renter on your mortgage application, as long as they’ve lived with you for at least a year prior. This can help boost your qualifying income and make it easier to get financing.
You might qualify for HomeReady or Home Possible if your household income is below local income limits and you have a credit score between 620 and 660.
FHA loans
FHA loans offer flexible approval requirements for repeat and first-time home buyers alike. This program, which the Federal Housing Administration backs, relaxes borrowers’ standards to get a mortgage. This can open up the home-buying process to more renters.
You might be able to get an FHA home loan with a debt-to-income ratio (DTI) up to 45% or a credit score as low as 580 while paying only 3.5% down
Select FHA lenders even allow credit scores as low as 500, provided the buyer can make a 10% down payment
Thanks to these perks and others, the FHA loan is one of the most popular low-down-payment mortgages on the market.
Check your FHA loan eligibility. Start here
VA loans
Veterans Affairs-backed VA loans provide military homebuyers with a number of advantages.
No down payment requirement. You can finance 100% of the purchase price. You can also refinance 100% of your home’s value using a VA loan
No mortgage insurance. But you will pay a one-time VA Funding Fee. You can wrap it into the loan amount.
No minimum credit score. Although lenders are allowed to add their own minimums. Those that do often require a FICO score of at least 580 to 620.
Sellers can pay up to 4% of the purchase price in closing costs. So if you find a motivated seller, you could potentially get into a home with nothing out of pocket
If you’re a veteran, active-duty service member, or surviving spouse, the VA mortgage program should be your first stop.
Check your VA loan eligibility. Start here
USDA loans
If you’re not buying in a large city, you may qualify for a USDA home loan. Officially called the Single-Family Housing Guaranteed Loan Program, the USDA loan was created to help moderate- and low-income borrowers buy homes in rural areas.
With a USDA loan, you can buy a home with no money down. The only catch is that you must buy in a USDA-approved rural area (though these are more widespread than you might think). You can find out if the property you’re buying is located in a USDA-eligible rural area and whether you meet local income limits using the USDA’s eligibility maps.
Your monthly payments might be cheaper, too. That’s because interest and mortgage insurance rates are typically lower for USDA loans than for FHA or conforming loans.
There are two types of USDA loans.
The Guaranteed Program is for buyers with incomes up to 115% of their Area Median Income (AMI)
The Direct Program is for those with incomes between 50% and 80% of the AMI
Standard USDA-guaranteed loans are available from many mainstream lenders. But the Direct program requires borrowers to work directly with the U.S. Department of Agriculture.
You typically need a credit score of 640 or higher to qualify.
Check your USDA loan eligibility. Start here
Low income home loan programs
Aside from mortgages that are designed to help people with low incomes buy a home, there are also a number of other programs that offer help to make homeownership more accessible.
Verify your home buying eligibility. Start here
Program
Description
Who Is Eligible
Hud Homes
Discounted homes sold by the Department of Housing and Urban Development.
Low- to moderate-income families, with preference for those who will make it their primary residence. May include single-family homes.
Housing Choice Voucher Program
Vouchers to subsidize the cost of housing in the private market.
Low-income families; must meet income and other criteria set by state and local housing programs.
Good Neighbor Next Door
Significant discounts on homes for teachers, firefighters, police officers, and EMTs.
Must commit to living in the property as a primary residence for at least 36 months. Includes single-family homes.
HFA Loans
Loans offered by state Housing Finance Agencies with reduced interest rates and down payment assistance.
First-time or repeat buyers with low to moderate incomes must meet income requirements. Often, it must be a primary residence.
Down Payment Assistance
Grants or loans to cover the down payment and sometimes closing costs.
Typically for low- to moderate-income families, though criteria can vary by program. Often for single-family homes.
State or Local Assistance
Various grants, loans, or tax credits are offered at the state or local level.
Eligibility varies but usually targets low- to moderate-income families. May include single-family homes.
Mortgage Credit Certificates
Tax credit to reduce federal income tax liability.
First-time homebuyers who meet income requirements; must be primary residence.
Manufactured and Mobile Homes
Loans or grants specifically for manufactured or mobile homes.
Low- to moderate-income families; must meet criteria set by specific housing programs. Usually must be primary residence.
Hud Homes
When the FHA forecloses on homes, those properties are often put up for sale as HUD Homes. And, you can generally purchase one at a steep discount. To qualify for a HUD Home, it will need to be your primary residence for at least 12 months. Additionally, you must not have purchased another HUD in the past 24 months.
Keep in mind that HUD Homes are sold as-is. Many are fixer-uppers. Moreover, HUD Homes are purchased through a bidding process. You’ll need a real estate agent or mortgage broker licensed with HUD to bid on an FHA property.
You can find HUD Homes on the official HUD website, hudhomestore.com. There, you’ll see all HUD real estate owned (REO) single-family properties in your area.
Good Neighbor Next Door
The Good Neighbor Next Door program offers unique benefits for nurses, first responders, and teachers. If you’re eligible, you can buy HUD foreclosure homes at a 50% discount. Use an FHA mortgage, and you only need $100 for a down payment.
You can find the homes on the U.S. Department of Housing and Urban Development website. You’ll also need a HUD-licensed real estate agent to put your offer in for you.
If your offer is accepted and you qualify for financing, you get the home. The 50% discount makes homeownership a lot more affordable. However, be aware that this discount is actually a second mortgage. But it has no interest and requires no payments. Live in the home for three years, and the second mortgage is forgiven entirely.
HFA home loans
Not to be confused with FHA loans, HFA loans are offered in partnership with state and local Housing Finance Authorities.
Many HFA loans are conventional mortgages backed by Fannie Mae and Freddie Mac. They may require as little as 3% down, and many HFA programs can be used with down payment assistance to reduce the upfront cost of home buying.
Borrowers who qualify for an HFA loan might also be in line for discounted mortgage rates and mortgage insurance premiums. To qualify, you’ll typically need a credit score of at least 620. But eligibility requirements vary by program.
Find and contact your state’s public housing finance agency or authority to learn more and see if you qualify. Also, be aware that this type of loan program will require additional approval steps that may make loan closing take longer.
Down payment assistance programs (DPAs)
Down payment assistance is exactly what it sounds like. It provides help with down payments on home purchases and often closing costs. Government agencies, nonprofits, and other sources commonly offer down payment and closing cost assistance. They are usually in the form of a grant or loan (though the loans may be forgiven if you stay in the house for five to ten years).
Most DPA programs target low-income home buyers and have guidelines that make qualifying easier. Some, however, provide assistance to people who buy in “underserved” or “redevelopment” areas, regardless of income. Many DPA programs offer assistance worth tens of thousands of dollars.
Talk to a lender about your options. Start here
Mortgage Credit Certificates (MCCs)
Mortgage credit certificates (MCCs) can stretch your home-buying power. If you meet income requirements, you could get a tax credit equal to some percentage of your mortgage interest. Lenders are allowed to add this credit to your qualifying income when underwriting your mortgage. This allows you to qualify for a higher mortgage amount than you otherwise could.
There are numerous states, counties, and cities that issue mortgage credit certificates, and their regulations and amounts vary greatly. Check with your local housing finance authority to find out whether MCCs are available where you live.
Housing Choice Voucher Program
The Housing Choice Voucher homeownership program (HCV) provides both rental and home buying assistance to eligible low-income households. Also known as Section 8, this program allows low-income home buyers to use housing vouchers to purchase their own homes.
Because local public housing agencies run these voucher programs, eligibility varies depending on location. Still, you’ll likely need to meet the following requirements:
Program-specific income and employment conditions
Being a first-time home buyer
Completing a pre-assistance homeownership and counseling program
Keep in mind that not all states offer voucher programs, and some programs have waiting lists. Also, these programs could limit how much you can sell the home for later on. To find out if your area offers a participating program, use the HUD locator web tool.
Manufactured and mobile homes
A manufactured home usually costs less than a traditional, site-built home. When placed on approved foundations and taxed as real estate, manufactured homes can be financed with mainstream mortgage programs.
Many programs require slightly higher down payments or more restrictive terms for manufactured homes. HomeReady, for example, increases the minimum down payment from 3% to 5% if you finance a manufactured home. Other programs require the home to be brand new.
Additionally, there are often requirements regarding the year the home was built and the property’s foundation. These guidelines will vary between lenders. Mobile homes that are not classified as real estate can be purchased with personal loans like the FHA’s Title 2 program. These are not mortgages because the homes are not considered real estate.
Check your mortgage options. Start here
Tips for buying a house with low income
Whether you’re buying a new home or your first home, these tips can help you achieve your homeownership goals.
Verify your home buying eligibility. Start here
Improve your credit history
Improving your FICO score is the best way to increase your chances of loan approval and qualify for lower mortgage rates.
The credit score needed to purchase a home varies depending on the type of loan you apply for. Conventional loans typically require a score of at least 620, while FHA loans often require at least 580.
Start by pulling free credit reports from annualcreditreport.com to determine your current score. Next, consider a few of the common methods for increasing credit scores. The amount of work that you’ll need to do will depend on your personal financial situation.
As an example, if your credit score is low because you’re using too much of your available credit, you may benefit from a debt consolidation loan to tame your high-interest account balances and improve your credit utilization.
On the other hand, if your credit history reveals missed payments, you’ll need to show at least 12 months of regular, on-time payments to improve your score.
Save for a down payment
The average first-time home buyer puts just 13% down on a new home. Yet, many loan programs require as little as 3% down or no down payment at all.
Remember that you still have to pay closing costs, which are typically around 2% to 5% of your mortgage loan amount. If you put less than 20% down, you’ll almost certainly have to pay for mortgage insurance.
In addition, you may need cash reserves in your savings account. This assures lenders that you can make your monthly mortgage payments should you suffer a financial setback. However, don’t let the down payment scare you away from homeownership. Many buyers qualify without even knowing it.
Pay down debts
Paying down debts will lower your debt-to-income ratio and improve your odds of mortgage approval. This is especially true for those with high-interest credit card debt.
You’ll likely qualify for lower rates when you have:
A low debt-to-income ratio (DTI)
High credit score
3% to 5% down payment
Stable income for the past two consecutive years
Use a first-time home buyer program
First-time buyer programs offer flexible guidelines for qualified buyers. Plus, these special programs exist in every state to help low-income households achieve homeownership.
Unlike traditional conventional loans, the government backs many first-time buyer mortgages. This allows mortgage lenders to offer loans with better rates and lower credit score requirements than they normally would be able to.
Verify your low income home loan eligibility. Start here
Model your budget
Owning a home requires more than qualifying for a loan and making monthly mortgage payments. Homeowners are responsible for a variety of ongoing costs, including:
Homeowners insurance
Property taxes
Mortgage insurance (in many cases)
Utility bills
Ongoing home maintenance
Home improvements
Appliance repair and replacement
Home buyers who have experience paying these ongoing costs of homeownership will be better prepared for the big day when they get the keys to their dream home.
Plus, sticking to this model budget in the months and years before purchasing a home and then saving the money you would spend on housing costs, such as insurance premiums and utilities, is a great way to build cash reserves and save for a down payment.
Use a co-signer
If you’re on the edge of qualifying for your own loan, using a co-signer may be an option.
Essentially, when you buy a house with a co-signer, you and your co-signer are both responsible for making the monthly payments. You’ll both also build and share in the home’s equity. Purchasing a home with a co-signer is quite common among unmarried couples, friends, and family members.
FAQ: Low income home loans
Verify your home buying eligibility. Start here
How do you buy a house with low income?
To buy a house with a low income, you have to know which mortgage program will accept your application. A few popular options include: FHA loans (allowing low income and as little as 3.5 percent down with a 580 credit score); USDA loans (for low-income buyers in rural and suburban areas); VA loans (a zero-down option for veterans and service members); and HomeReady or Home Possible (conforming loans for low-income buyers with just 3 percent down).
I make $25K a year; can I buy a house?
Mortgage experts recommend spending no more than 28 percent of your gross monthly income on a housing payment. So if you make $25K per year, you can likely afford around $580 per month for a house payment. Assuming a fixed interest rate of 6 percent and a 3 percent down payment, that might buy you a house worth about $100,000. But that’s only a rough estimate. Talk with a mortgage lender to get the exact numbers for your situation.
How do I qualify for a low-income mortgage?
Whether or not you qualify for a low income home loan depends on the program. For example, you might qualify for an FHA mortgage with just 3.5 percent down and a 580 credit score. Or, if your house is in a qualified area and you’re below local income caps, you might be able to get a zero-down USDA mortgage. Veterans can qualify for a low-income mortgage using a VA loan. Or, you can apply for the mortgage with a co-borrower and qualify based on combined incomes.
What programs are available for first-time home buyers?
Low income home loans can help first-time home buyers overcome hurdles like low credit or income, smaller down payments, or high levels of debt. A few good programs for first-time home buyers include Freddie Mac’s Home Possible mortgage, Fannie Mae’s HomeReady mortgage, the Conventional 97 mortgage, and government-backed loans like FHA, USDA, and VA. First-time home buyers can also apply for down payment assistance grants through their state or local housing department.
Can the government help me buy a house?
There are a number of ways the government can help you buy a house. Perhaps the most direct way to get help is by applying for down payment assistance. This is a grant or low-interest loan to help you make a down payment. You can also buy a house using a government-backed mortgage, like the FHA or USDA. With these programs, the government essentially insures the loan, so you can buy with a lower income, credit score, or down payment than you could otherwise.
How do I buy a house without proof of income?
You can no longer buy a house without proof of income. You have to prove you can pay the loan back somehow. But there are modern alternatives to stated-income loans. For instance, you can show “proof of income” through bank statements, assets, or retirement accounts instead of W2 tax forms (the traditional method). Many people who want to buy a house without proof of income these days find a bank statement loan to be a good option.
How do you rent to own?
A lease option or rent-to-own home isn’t exactly what it sounds like. You don’t simply rent until the house is paid off. Instead, you usually pay a higher rent for a set period of time. That excess rent then goes toward a down payment when you buy the house at a later date. Rent-to-own might help you buy a house if you don’t have a lot of cash on hand right now or if you need to improve your credit score before applying for a mortgage. However, rent-to-own requires seller cooperation and comes with unique risks.
Can I rent-to-own with no down payment?
Rent-to-own does not mean you can buy a house with no down payment. When you rent-to-own, you’re paying extra rent each month that will go toward your down payment later on. And usually, rent-to-own contracts include an option fee that’s a lot like a down payment. The option fee is smaller. Think 1 percent of the purchase price instead of 3 to 20 percent. And that fee eventually goes toward your purchase. But it’s still a few thousand dollars you must pay upfront to secure the right to buy the home later on.
Can I get a grant to buy a house?
Qualified buyers can get a grant to buy a house. These are called down payment assistance grants. They won’t pay for the whole house, but they can help cover your down payment to make a mortgage more affordable. You’re most likely to qualify for a grant to buy a house if you have a low to moderate income and live in a target area.
What type of low income home loan is the easiest to qualify for?
FHA loans are generally the easiest low income home loan to qualify for. The federal government insures these loans, which means lenders can relax their qualifying rules. It’s possible for a home buyer with a credit score of 500 to get approved for an FHA loan, but most FHA lenders look for scores of 580 or better. And a FICO score of 580 lets you make the FHA’s minimum down payment of 3.5 percent.
How can I get a home loan with low monthly payments?
To get the lowest possible monthly payment, choose a 30-year loan term, find a cheaper home, put more money down, and make sure you have excellent credit before applying for your mortgage. If you can afford a 20 percent down payment, you can avoid PMI premiums, which lower your monthly payments even more. Veterans can get VA loans that require no PMI, regardless of their down payment size.
What’s the lowest amount you can put on a house?
Some home buyers can put no money down with a VA or USDA loan. Conventional loans will require at least 3 percent down, and FHA loans will require at least 3.5 percent down. Down payment assistance grants and loans could help you cover some or all of this down payment.
How much house can I afford if I make $30K a year?
If you make $30,000 a year, you could probably spend about $110,000 on a house, assuming you get a 30-year fixed-rate mortgage at 6 percent. This is a rough estimate. Your unique financial situation may be different. Getting a pre-approval from a lender is the only way to find your actual price range.
What are today’s mortgage rates for low income home loans?
Many low-income mortgage programs have lower interest rates than “standard” mortgage loans. So you might get a great deal.
However, interest rates vary depending on the borrower, the loan program, and the lender.
To find out where you stand, you’ll need to compare loan offers from several lenders and then choose your best deal.
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Mortgage interest rates inched up this week, following nine straight declines totaling a decrease of 118 basis points (1.18%).
The average 30-year fixed rate mortgage (FRM) rose from 6.61% on Dec. 28 to 6.62% on Jan. 4, according to Freddie Mac.
“Given the expectation of rate cuts this year from the Federal Reserve, as well as receding inflationary pressures, we expect mortgage rates will continue to drift downward as the year unfolds,” said Sam Khater, Freddie Mac’s Chief Economist.
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Will mortgage rates go down in January?
Mortgage rates fluctuated significantly in 2023, with the average 30-year fixed rate going as low as 6.09% on Feb. 2 and as high as 7.79% on Oct. 26, according to Freddie Mac.
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The range can be largely attributed to the Federal Reserve’s ongoing fight against inflation, juxtaposed with uncertainty in the banking sector sparked by Silicon Valley Bank’s collapse. However, with duress permeating the financial market and the fallout from U.S. debt ceiling talks, the Fed may continue making hikes to bring interest rates down.
With the economy likely heading into a recession, it’s possible we’ve already seen the peak of this rate cycle. Of course, interest rates are notoriously volatile and could tick back up on any given week.
Experts from CoreLogic, Home Qualified, Realtor.com and others weigh in on whether 30-year mortgage rates will climb, fall, or level off in January.
Expert mortgage rate predictions for January
Craig Berry, branch manager at Acopia Home Loans
Prediction: Rates will moderate
“As inflation is the no. 1 item on the Federal Reserve’s radar right now, the Feds may choose not to lower the federal funds rate until inflation comes down. And, while Fed rate cuts aren’t a must-have in order for mortgage rates to come down, interest rates are affected by the federal funds rate.
The Feds continue to seek a balance between inflation and maximum employment so as not to cause significant damage to the economy which could trigger a recession. Recent momentum has been positive, and as long inflation cooperates, mortgage rates may see a slight decline in January. However, it isn’t likely that we’ll see significant drops to longer-term rates until we get further into 2024.”
Ralph DiBugnara, president at Home Qualified
Prediction: Rates will fall
“Rates finally shifted down some in December and stabilized lower. U.S. payrolls came in lower than anticipated, unemployment was up and building of new homes was down. These are good signs that inflation may have reached its peak and could trigger a lowering of rates. I expect the Fed to stay neutral for the time being and possibly through the first quarter of the year with possible cuts coming only if we see a drastic shift in the economy. For January, I believe the average 30-year fixed will land at 7.125% and the 15-year fixed will be 6.75%.”
Selma Hepp, chief economist at CoreLogic
Prediction: Rates will fall
“Mortgage rates should continue to decline, albeit very gradually and given there are no surprises with inflation. We should see rates fall below 7% mark.”
Hannah Jones, senior economic research analyst at Realtor.com
Prediction: Rates will fall
“If inflation and employment data continue to show signs of slowing, mortgage rates are likely to ease in January, though at a slower clip than in recent weeks. As incoming data confirms that the economy is indeed cooling, the upward pressure on mortgage rates will continue to let up and buyers will enjoy lower rates than in recent months.
However, if inflation or employment data come in stronger than expected, we could see rates pick up steam once again. Investors expect the Fed to hold steady at the current target rate in next week’s meeting, which would signal the Committee’s confidence in the current policy stance to bring inflation down to the target 2%. As inflation reaches the target level, mortgage rates will continue to drift lower.”
Jess Kennedy, COO at Beeline
Prediction: Rates will fall
“We expect rates to continue to ease as we kick off 2024. You can see the signaling of a rate cut from the Fed in many ways. For example, it is harder to find long-term CDs at the higher interest rates we were seeing 45-60 days ago). Publicly traded companies are also seeing their stock prices move higher on the expectation of rate relief in 2024. All these signs signal rates start to tick down even ahead of an official rate cut.”
Odeta Kushi, deputy chief economist at First American
Prediction: Rates will fall
“In light of favorable trends in inflation and labor market data, the Federal Reserve appears to be on a path towards its goals, although achieving its 2% inflation target will take some time. Consequently, the Fed is expected to maintain a restrictive stance, which will keep mortgage rates elevated. However, given slowing inflation and a cooling labor market, and barring any unforeseen developments, modest reductions in mortgage rates are possible in January.”
Rick Sharga, CEO at CJ Patrick Company
Prediction: Rates will fall
“With inflation moving in the right direction, wage growth slowing, and the jobs market softening a bit, it seems likely that the Federal Reserve has finished rate hikes for this cycle. That, coupled with weakening bond yields, should create an environment where mortgage rates can start a gradual, but steady decline throughout 2024. January rates for 30-year fixed-rate loans will probably straddle 7% — ranging from 7.1% to about 6.9% as the market finds its footing to begin the year.”
Mortgage interest rates forecast next 90 days
As inflation ran rampant in 2022, the Federal Reserve took action to bring it down and that led to the average 30-year fixed-rate mortgage spiking in 2023.
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With inflation gradually cooling, the Fed adjusted its policies with smaller and skipped hikes. Additionally, the economy showing signs of slowing has many experts believing mortgage interest rates will gradually descend in 2024.
Of course, rates could rise on any given week or if another global event causes widespread uncertainty in the economy.
Mortgage rate predictions for 2024
The 30-year fixed-rate mortgage averaged 6.62%% as of Jan. 4, according to Freddie Mac. All five major housing authorities we looked at project 2024’s first quarter average to finish above that.
The National Association of Home Builders sits at the low end of the group, predicting the average 30-year fixed interest rate to settle at 7.04% for Q1. Meanwhile, Fannie Mae had the highest forecast of 7.6%.
Housing Authority
30-Year Mortgage Rate Forecast (Q1 2024)
National Association of Home Builders
6.77%
Wells Fargo
6.85%
Fannie Mae
7.00%
Mortgage Bankers Association
7.00%
National Association of Realtors
7.50%
Average Prediction
7.02%
Current mortgage interest rate trends
Mortgage rates came down for the ninth consecutive week.
The average 30-year fixed rate increased from 6.61% on Dec. 28 to 6.62% on Jan. 4 The average 15-year fixed mortgage rate fell, going from 5.93% to 5.89%.
Get started shopping for mortgage rates
Month
Average 30-Year Fixed Rate
December 2022
6.36%
January 2023
6.27%
February 2023
6.26%
March 2023
6.54%
April 2023
6.34%
May 2023
6.43%
June 2023
6.71%
July 2023
6.84%
August 2023
7.07%
September 2023
7.20%
October 2023
7.62%
November 2023
7.44%
December 2023
6.82%
Source: Freddie Mac
After hitting record-low territory in 2020 and 2021, mortgage rates climbed to a 23-year high in 2023. Many experts and industry authorities believe they will follow a downward trajectory into 2024. Whatever happens, interest rates are still below historical averages.
Dating back to April 1971, the fixed 30-year interest rate averaged around 7.8%, according to Freddie Mac. So if you haven’t locked a rate yet, don’t lose too much sleep over it. You can still get a good deal, historically speaking — especially if you’re a borrower with strong credit.
Just make sure you shop around to find the best lender and lowest rate for your unique situation.
Mortgage rate trends by loan type
Many mortgage shoppers don’t realize there are different types of rates in today’s mortgage market. But this knowledge can help home buyers and refinancing households find the best value for their situation.
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Which mortgage loan is best?
The best mortgage for you depends on your financial situation and your goals.
For instance, if you want to buy a high-priced home and you have great credit, a jumbo loan is your best bet. Jumbo mortgages allow loan amounts above conforming loan limits, which max out at $ in most parts of the U.S.
On the other hand, if you’re a veteran or service member, a VA loan is almost always the right choice. VA loans are backed by the U.S. Department of Veterans Affairs. They provide ultra-low rates and never charge private mortgage insurance (PMI). But you need an eligible service history to qualify.
Conforming loans and FHA loans (those backed by the Federal Housing Administration) are great low-down-payment options.
Conforming loans allow as little as 3% down with FICO scores starting at 620. FHA loans are even more lenient about credit; home buyers can often qualify with a score of 580 or higher, and a less-than-perfect credit history might not disqualify you.
Finally, consider a USDA loan if you want to buy or refinance real estate in a rural area. USDA loans have below-market rates — similar to VA — and reduced mortgage insurance costs. The catch? You need to live in a ‘rural’ area and have moderate or low income to be USDA-eligible.
Mortgage rate strategies for January 2024
Mortgage rates displayed their famous volatility in 2023. Uncertainty in the banking sector led to downtrends, but ongoing inflation battles, Fed hikes and a hot job market drove growth.
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At its September and November meetings, the central bank held off on a rate hike, preferring to see if the economy would keep cooling organically. In December, the FOMC skipped a hike and projected cuts for 2024. As always, the committee said it would adjust its policies as necessary — which could mean additional hikes or possibly none at all.
Here are just a few strategies to keep in mind if you’re mortgage shopping in the coming months.
Be ready to move quickly
Indecision can lead to failure or missed opportunities. That holds true in home buying as well.
Although the housing market is becoming more balanced than the recent past, it still favors sellers. Prospective borrowers should take the lessons learned from the last few years and apply them now even though conditions are less extreme.
“Taking too long to decide to make an offer can lead to paying more for the home at best and at worst to losing out on it entirely. Buyers should get pre-approved (not pre-qualified) for their mortgage, so that the seller has some certainty about the deal closing. And be ready to close quickly — a long escrow period will put you at a disadvantage.
And it’s definitely not a bad idea to work with a real estate agent who has access to “coming soon” properties, which can give a buyer a little bit of a head start competing for the limited number of homes available,” said Rick Sharga.
Buyer demand is lower than a typical year, but the market usually heats up in spring and summer. Being decisive (and prepared) should only play to your advantage.
Shopping around isn’t only for the holidays
Since interest rates can vary drastically from day to day and from lender to lender, failing to shop around likely leads to money lost.
Lenders charge different rates for different levels of credit scores. And while there are ways to negotiate a lower mortgage rate, the easiest is to get multiple quotes from multiple lenders and leverage them against each other.
“For potential home buyers, it’s important to get quotes from multiple lenders for a mortgage, as rates can vary dramatically, especially during such a volatile period,” said Odeta Kushi.
As the mortgage market slows due to lessened demand, lenders will be more eager for business. While missing out on the rock-bottom rates of 2020 and 2021 may sting, there’s always a way to use the market to your advantage.
How to shop for interest rates
Rate shopping doesn’t just mean looking at the lowest rates advertised online because those aren’t available to everyone. Typically, those are offered to borrowers with great credit who can put a down payment of 20% or more.
The rate lenders actually offer depends on:
Your credit score and credit history
Your personal finances
Your down payment (if buying a home)
Your home equity (if refinancing)
Your loan-to-value ratio (LTV)
Your debt-to-income ratio (DTI)
To figure out what rate a lender can offer you based on those factors, you have to fill out a loan application. Lenders will check your credit and verify your income and debts, then give you a ‘real’ rate quote based on your financial situation.
You should get three to five of these quotes at a minimum, then compare them to find the best offer. Look for the lowest rate, but also pay attention to your annual percentage rate (APR), estimated closing costs, and ‘discount points’ — extra fees charged upfront to lower your rate.
This might sound like a lot of work. But you can shop for mortgage rates in under a day if you put your mind to it. And shaving just a few basis points off your rate can save you thousands.
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Mortgage interest rate FAQ
What are current mortgage rates?
Current mortgage rates are averaging 6.62% for a 30-year fixed-rate loan and 5.89% for a 15-year fixed-rate loan, according to Freddie Mac’s latest weekly rate survey. Your individual rate could be higher or lower than the average depending on your credit score, down payment, and the lender you choose to work with, among other factors.
Will mortgage rates go down next week?
Mortgage rates could decrease next week (Jan. 8-12, 2024) if the mortgage market takes a cautious approach to a possible recession. However, rates could rise if lenders account for the Federal Reserve taking measures to counteract inflation or if a global event brings economic uncertainty.
Will mortgage interest rates go down in 2024?
If inflation continues to dissipate and the economy cools or goes into a recession, it’s likely mortgage rates will decrease in 2024. Although, it’s important to remember that interest rates are notoriously volatile and are driven by many factors, so they can rise during any given week.
Will mortgage interest rates go up in 2024?
Mortgage rates may continue to rise in 2024. High inflation, a strong housing market, and policy changes by the Federal Reserve have all pushed rates higher in 2022 and 2023. However, if the U.S. does indeed enter a recession, mortgage rates could come down.
What is the lowest mortgage rate right now?
Freddie Mac is now citing average 30-year rates in the 7% range. If you can find a rate in the 5s or 6s, you’re in a very good position. Remember that rates vary a lot by borrower. Those with perfect credit and large down payments may get below-average interest rates, while poor-credit borrowers and those with non-QM loans could see much higher rates. You’ll need to get pre-approved for a mortgage to know your exact rate.
Will there be a housing crash?
For the most part, industry experts do not expect the housing market to crash in 2023. Yes, home prices are over-inflated. But many of the risk factors that led to the 2008 crash are not present in today’s market. Low inventory and massive buyer demand should keep the market propped up next year. Plus, mortgage lending practices are much safer than they used to be. That means there’s not a subprime mortgage crisis waiting in the wings.
What is the lowest mortgage rate ever?
At the time of this writing, the lowest 30-year mortgage rate ever was 2.65%. That’s according to Freddie Mac’s Primary Mortgage Market Survey, the most widely used benchmark for current mortgage interest rates.
Should I lock my rate now or wait?
Locking your rate is a personal decision. You should do what’s right for your situation rather than trying to time the market. If you’re buying a home, the right time to lock a rate is after you’ve secured a purchase agreement and shopped for your best mortgage deal. If you’re refinancing, you should make sure you compare offers from at least three to five lenders before locking a rate. That said, rates are rising. So the sooner you can lock in today’s market, the better.
Is now a good time to refinance?
That depends on your situation. It’s a good time to refinance if your current mortgage rate is above market rates and you could lower your monthly mortgage payment. It might also be good to refinance if you can switch from an adjustable-rate mortgage to a low fixed-rate mortgage; refinance to get rid of FHA mortgage insurance; or switch to a short-term 10- or 15-year mortgage to pay off your loan early.
Is it worth refinancing for 1 percent?
It’s often worth refinancing for 1 percentage point, as this can yield significant savings on your mortgage payments and total interest payments. Just make sure your refinance savings justify your closing costs. You can use a mortgage calculator or speak with a loan officer to crunch the numbers.
How do I shop for mortgage rates?
Start by choosing a list of three to five mortgage lenders that you’re interested in. Look for lenders with low advertised rates, great customer service scores, and recommendations from friends, family, or a real estate agent. Then get pre-approved by those lenders to see what rates and fees they can offer you. Compare your offers (Loan Estimates) to find the best overall deal for the loan type you want.
What are today’s mortgage rates?
Mortgage rates are rising, but borrowers can almost always find a better deal by shopping around. Connect with a mortgage lender to find out exactly what rate you qualify for.
Time to make a move? Let us find the right mortgage for you
1Today’s mortgage rates are based on a daily survey of select lending partners of The Mortgage Reports. Interest rates shown here assume a credit score of 740. See our full loan assumptions here.
If you’re financing a home with a mortgage, ensuring you get the best possible rate is one of the smartest financial moves you can make.
While it takes some legwork, the pay off is hard to argue with. Shaving even a fraction of a point from your rate can save you hundreds of dollars each month and tens of thousands over the life of the loan.
For example, with a $400,000 mortgage, dropping from a 7% to a 6.5% rate would save you almost $50,000 in interest over a 30-year term—roughly enough to pay for a year of private college.
Mortgage rates change constantly—and differ across mortgage companies. Here’s how to take advantage of those facts, compare current mortgage rates and get the best deal.
Current mortgage rates: How high are average mortgage rates right now?
WEEK ENDING
AVERAGE 30-YEAR FIXED RATE
AVERAGE 15-YEAR FIXED RATE
Dec. 28, 2023
6.61%
5.93%
Dec. 21, 2023
6.67%
5.95%
Dec. 14, 2023
6.95%
6.38%
Dec. 7, 2023
7.03%
6.29%
Nov. 30, 2023
7.22%
6.56%
Freddie Mac
Mortgage rates continued to cool in December, though averages remain high compared to recent years. According to mortgage-purchaser Freddie Mac, the average rate on 30-year fixed-rate mortgages fell from 7.22% at the start of the month to 6.61% today.
Rates dropped thanks to the Federal Reserve, which indicated cuts to its federal-funds rate—which mortgage rates generally follow—are likely come 2024. “This was a positive for mortgage rates, as we have seen them drop to a several-months low,” says Scott Haymore, who heads up mortgage pricing at TD Bank.
The drop in rates has spurred a modest increase in affordability for homebuyers. According to the Mortgage Bankers Association, the average new mortgage payment is now $2,137, down about $60 compared to November.
Still, rates are also a far cry from the record-low of 2.65% that came during the pandemic.
AVERAGE RATE
DATE
Current rate
6.61%
Dec. 28, 2023
This time last year
6.42%
Dec. 29, 20222
Highest point in last decade
7.79%
Oct. 26, 2023
All-time high
18.53%
Oct. 16, 1981
All-time low
2.65%
Jan 7, 2021
Freddie Mac
Where are mortgage rates headed?
Mortgage rates are influenced by many factors, including the economy, investments into mortgage-backed securities, the Treasury bond market, inflation and, perhaps most important in recent years, moves by the Federal Reserve.
Between March 2022 and July 2023, the Fed increased the federal-funds rate—the rate at which banks can borrow money—11 times. And over that period, 30-year mortgage rates jumped from under 4% to over 7%. (To be clear: The Fed doesn’t directly set mortgage rates. Its federal-funds rate and mortgage rates tend to move in the same direction, though.)
The Fed has recently been easing off those rate hikes, opting to keep rates as-is at the last three meetings. If inflation keeps dropping—it fell to 3.1% in November—Fed officials expect to make three potential rate cuts next year, though nothing is set in stone. This would likely mean further drops in mortgage rates, too.
MBA currently projects the average 30-year mortgage rate will fall to 6.1% by the end of 2024. Mortgage purchaser Fannie Mae expects rates to drop to 6.5% by year’s end. Both would be an improvement, but according to Haymore, it won’t do much for overall housing affordability.
“Housing inventory remains low and affordability is an issue for many potential homebuyers,” Haymore says. “Those challenges will continue—even with rates falling.”
How are mortgage rates set?
While the Fed influences mortgage rates, it is only one piece of the puzzle. Other external factors play a role, too—as do the details of your financial situation and loan choice.
Here’s what you need to know about what determines your mortgage rate.
External factors
The overall state of the economy is a big contributor to the path of mortgage rates. When the economy is strong, rates tend to be higher. When the economy sputters, rates drop.
“Interest rates often will rise or fall based on the strength of the economy, and ironically, bad news can be good news for lower interest rates,” says Bill Banfield, an executive at lender Rocket Mortgage.
This is due in part to how economic conditions impact investment activity. When there are geopolitical concerns or the economy is wavering, investors tend to flock to safer investments—which include things such as Treasury bonds and mortgage-backed securities. This pushes the yields on those securities down (yields fall when bond prices rise), taking mortgage rates down with them.
“When there is high demand for mortgage-backed securities, the prices of those MBS increase, which in turn can lower mortgage interest rates,” says Tanya Blanchard, founder of mortgage brokerage Madison Chase Capital Advisors. “This is because investors are willing to accept lower returns on their investments when the prices of MBS are high.”
Finally, inflation factors in, too—and not just because of the Fed reaction. It also increases the costs for lenders to originate loans, which drives their prices higher as well.
Personal factors
Your personal finances will factor into your interest rate as well. First, there’s your credit score. Mortgage lenders use this number to gauge your risk as a borrower—or how likely you are to default on your loan. The lower your score, the higher the rate you’ll need to pay to compensate for the perceived risk.
“Credit score is a very important consideration when applying for a mortgage,” Banfield says. “If someone has a proven track record of being responsible with their finances, they’ll be more likely to get a mortgage and a better rate.”
The size of your down payment is important, too. A larger down payment means you have more to lose, which hopefully discourages you from defaulting. Smaller down payments, on the other hand, mean more risk for the lender and higher rates for you as a result.
Loan-specific factors
Last but not least, the type of mortgage loan you choose will also influence your rate. Loans backed by the government, such as Federal Housing Administration-backed FHA loans and Veterans Affairs-backed VA loans, tend to have lower rates than conventional or jumbo loans since they come with the federal government’s protection. Shorter-term loans (15 years, for example) also have lower rates than longer-term ones (30 years).
As Goodwin explains, “While a shorter-term loan will come with a higher monthly payment, it could save you thousands on interest in the long run.”
How, when and why to compare mortgage rates from different lenders
Because every lender has different overhead costs, operating capacities and appetite for risk, mortgage rates can vary significantly from one company to the next. That’s why it’s important to consider several lenders before choosing where to get your loan.
Freddie Mac recommends getting at least four quotes (it could save you an average of $1,200 a year, apparently). Just make sure you’re not only going by the rates a lender advertises on their website or on third-party sites.
“Looking at advertised rates alone is not a good way to shop around,” Goodwin says. “Lenders typically display the lowest rates they offer as a headline to attract leads, but the actual rate you may be offered can vary dramatically depending on your own financial situation and the kind of loan you’re looking for.”
Many advertised rates also include mortgage points—meaning you would need to pay an extra upfront fee to snag it.
To get a rate that is truly a reflection of what you would pay as a borrower, you need to apply for preapproval. You’ll have to fill out an application and agree to a credit check for this. Once you’re done, you’ll get a loan estimate that will detail the total loan amount you are likely to qualify for, plus your interest rate and expected closing costs—or the fees required to originate, underwrite and close on your loan. Be sure to look at the APR, too—the annual percentage rate. This reflects the total annual cost of the loan, considering both your rate and any fees.
Be warned, though: The rates you’re quoted aren’t guaranteed until you lock your rate. A rate lock guarantees your interest rate for a set period—usually only 30 to 60 days, depending on the lender. You’ll typically do this once you’ve found a home and have a contract in place.
How to calculate your mortgage costs
Comparing mortgage offers might seem tedious, but financially, it’s usually worthwhile. Even a small change in rate can have a big impact on your monthly payment and long-term interest costs.
You can use a mortgage calculator to break down the exact costs or use your loan estimate. This should detail your monthly payment, your interest rate and your total interest paid in five years.
See the difference that incremental rate changes can make on the cost of a 30-year, $400,000 home loan below:
RATE
MONTHLY PAYMENT
INTEREST OVER 30 YEARS
5%
$2,147
$373,023
5.25%
$2,208
$395,173
5.50%
$2,271
$417,616
5.75%
$2,334
$440,344
6%
$2,398
$463,352
6.25%
$2,462
$486,632
6.50%
$2,528
$510,177
6.75%
$2,594
$533,981
7%
$2,661
$558,035
Keep in mind that most mortgage loans are amortized, meaning the total costs are calculated and then paid in even payments across the loan term. With these loans, you’ll pay more interest upfront and less toward the end of the term. For example, your first payment at 6% would see $2,000 go toward interest, while your final payment would have just $11.93.
“At the beginning of the loan term, the majority of the monthly payment will go toward interest,” says Colleen Bara, a lending executive with Key Bank. “As the loan is paid down, more of the monthly payment is allocated toward the pay-down of the principal balance.”
This means if you sell your home quickly after taking out your loan, you likely won’t have paid down your balance much—and may not make much from the home, profit-wise. If this is a concern, making an extra payment each year you’re in the house can help.
“Make one extra principal payment yearly and you can shave off approximately seven years of interest,” Blanchard says.
More on Mortgages
The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.
After nearly two years of trudging through a frozen housing market, the consensus among mortgage professionals is that the worst of it is over.
The Federal Reserve recently signaled plans to slash interest rates three times in 2024, shifting toward the next phase in its monetary policymaking.
“It finally seems like we are turning a corner and that’s good news after two years of the Fed’s negative perspective that we’ve heard,” Max Slyusarchuk, CEO of A&D Mortgage, said in an interview.
The spread between the 30-year fixed-rate mortgage and the 10-year Treasury yield has narrowed after sitting at over 300 basis points, compared to the historic norm of 150 bps.
But how much will the decline in mortgage rates and a narrowing of the spreads breathe life into the dour origination landscape?
“At the end of the day if mortgage rates come down, I don’t just think that’s gonna solve the inventory problem right away,” said Ben Cohen, managing director at Guaranteed Rate.
“There’s still going to be a lag. So my concern is that rates are going to come down but inventory is not going to just all of a sudden be plentiful and now we’re in a situation where home prices get driven up because there is still low inventory. You have all these buyers that have been waiting for rates to come back and now they’re back and all this becomes really competitive again.”
Mortgage professionals say 2024 will be a ‘recovery year’ as markets slowly return to normal. But a combination of factors – high home prices, lack of inventory, elevated rates — temper expectations for even a moderately strong year.
HousingWire interviewed a dozen loan officers and mortgage executives about their strategies for 2024, which mortgage products they expect to be in demand, and the magic rate needed to get sellers and buyers back in the market.
Strategies for 2024
I’m heavily focused on recruiting, improving technology and marketing, empowering the loan officers — by giving them the same technology and marketing support. Whatever I have for me, I will do it for them as well. This way I can help them grow their business.
We will use AI to help with customer service. AI can understand the loan status, a loan profile and AI can respond to the consumer. If they want to know what’s going on with rates, their loan, AI can give them an answer.
The second project I’m working on is having a mobile app where the the client can download the app and use it to take care of their transaction. We are going to shift to using a mobile app so we don’t have to use phone calls, emails and text messages anymore.
— Thuan Nguyen, CEO of Loan Factory, Inc.
A lot of what you hear is very cliche-ish. You have to make more calls, got to call on more people — all that is true.
But I think it’s more complex than that.
A successful loan officer in this market needs a very capable qualified assistant. I think they need to have all systems firing, meaning they’ve got to do the traditional stuff where you’re doing broker open houses, you’re going to open houses, you are doing coffee clutches and breakfasts and all that.
Simultaneous to that, I think you got to be heavily engaged in what I call the ‘virtual war’ and that means you’re driving your social media and you’re in your your subscribing to systems that drive alerts to your database’s activity. And then you have to have a process in a system to manage those alerts and have outreach to those alerts to where you’re capitalizing on them in a quick time.
— John Palmiotto, chief production officer at The Money Store
What people who don’t understand marketing have done is unintentional marketing. They’re just doing what they see everybody else doing and what we’re finding is those who are succeeding today and are going to thrive in 2024 have a lot of intention in their social media.
It’s not social media, it’s social networking. Networking has always been a key component to drive growth and fostering true community with your referral partners and your sphere of influence. So you have to be intentional, you have to be very strategic – understanding the audience that you’re going after and leveraging it as a social networking platform.
— Shane Kidwell, CEO of Dwell Mortgage
We’re now having to put in work every day without necessarily reaping the immediate reward. Staying disciplined to putting in the effort every single day at the absolute highest level even though we’re not going to see the immediate reward.
We’re laying the constant groundwork word doing the agent training. We’re doing it to where some of that is not reaping us rewards here. It’s that type of mindset that we have to have, because luck is hard work meeting opportunity.
— Matt Weaver, VP of mortgage sales at CrossCountry Mortgage
I recently got licensed in the state of Ohio because that’s where I’m from. I have a lot of connections in Ohio. I’m comfortable with lending there because I know I’m very familiar with the area. I think a lot of my friends and family members and circle of influence up there are going to be refinancing in the next six, 12, 18 months and I want to be licensed and ready to go when that time comes so that I can help them.
— Justin McCrone, loan officer at Atlantic Coast Financial Services
Origination goals
I would be happy with doing $65 million to $75 million next year. I left and joined Revolution in 2023 for a couple months with no origination, I’m probably gonna hover around $50 million this year, whereas I did $100 million in 2022 at Guaranteed Rate.
— Larry Steinway, senior vice president of mortgage lending and branch manager of Revolution Mortgage
The Mortgage Bankers Association (MBA) has a report on where they think the business is going, you have Fannie Mae on where they think the business is going. We look at all that and then we look at the size of the sales team, who we’ve recruited, what we think how much business will pick up.
I think the first quarter is going to be tough. And I think it’ll pick up once you get past the first quarter spring market and on. So we’re planning for a 20% increase.
— Jon Overfelt, director of sales and principal at American Security Mortgage Corp.
I think I’m doing marginally better than this year. We’re now looking at a declining rate environment versus the rising rate environment. So that will allow people to be more optimistic. I would imagine we’ll be about 10 to 15% better next year than this year.
— Robby Oakes, managing director at CIMG Residential Mortgage
Popular products
Given the rate cycle over the past two years and the record level of available home equity that consumers are sitting on, the second mortgage market is a huge opportunity for originators to serve the cash-out and debt consolidation needs of their clients without touching their low rate first mortgage, make much needed origination income and keep the client close so they can service them again in the next cycle. Home equity is really a no-brainer today.
Non-QM is also a huge opportunity for originators to serve the needs of their clients and make much needed origination income. Originators will be battling it out again next year for purchase and refinance volume again that fall into the standard agency, government, jumbo buckets. The rate and term and cash-out refinance market will rely on rates decreasing, but even if they move to 6% next year, the industry will struggle with refinances.
— Paul Saurbier, SVP of strategy at Spring EQ
There’s a big push for home affordability. So there’s a lot of programs out there for first-time homebuyers based on where they’re actually buying their home and what their income is. There’s incentives for those people to get into the home a little bit cheaper than who’s already been a homeowner and can’t take advantage of those programs.
So to me, it’s still a big first-time buyer market in 2024. I’m not saying there are people that are existing but the people that are existing homeowners are only going to move if they absolutely have to move.
–Ben Cohen, managing director at Guaranteed Rate
I think for sure the non-QMs – the more flexible guideline programs are going to continue to be big, especially for people who are investors or self-employed aging populations.
Obviously for people with good credit, good income, solid assets, the 30-year fixed conventional mortgages is the most amazing program that exists for consumers because you don’t have any risk if rates go up and if rates go down you get to refinance and get a lower rate.
I don’t know if it’s national, but 30% of deals right [in my market in California] now are all-cash and so competing against all-cash is still going to be a concern for folks. So that means our job is not only to get them educated on their loan options, but also to make sure we are solid so we get fully underwritten files, making sure we do a lot of work on the front-end so we’re not missing out on deals.
— Brady Thomas, branch manager at American Pacific Mortgage
Home equity products will continue to be attractive options for homeowners looking for specific needs. Based on the goals of the homeowner, Adjustable Rate Mortgages (ARMs) may offer some flexibility. As rates start to tick down throughout 2024, traditional refinances will begin to make more financial sense, as well.
— Michael Merritt, SVP of customer care and default mortgage servicing at BOK Financial
Magic rate?
I would say 5.5%. But the issue is home prices are too high. In order to have the market return to normal, they have to come down a lot more. If rates and prices both come down, it’s easier. But this time, the price might not come down so we have to rely on the rates.
— Thuan Nguyen – CEO of Loan Factory, Inc.
When we get rates in the 5%, I think it’s gonna be fun to be in this business again because people will be willing to leave their 3% interest rate. I think we are going to see (traditional) refinancing transactions really start to kick in in the second half of 2024, 2025.
— Larry Steinway, senior vice president of mortgage lending and branch manager of Revolution Mortgage
I think if we get rates to come down into the 5% range, that’s going to help quite a bit. If people got rates of 7% and 7.5% and they can get a rate at 5%, that’s a refi boom for all of those buyers.
I think rates in the 5%-range or low 6% levels will bring buyers back to the market, but I don’t think we would get a ton of sellers until we have rates in the 4% or low 5%. Somebody who might want to move because they need an extra bedroom or want a bigger backyard won’t move if rates are still at 6% and they’re going from a rate of 3%. But they might do it if they’re getting 4.5%.
— Brady Thomas, branch manager at American Pacific Mortgage
Business was really busy when they were in the low 6% range and the high 5% levels. If you look back earlier in the year when we had the banking crisis hit, business picked up a lot then and that’s about where rates were – in the high 5%, low 6%. I think somewhere in there, you would see a pretty good pickup.
— Jon Overfelt, director of sales and principal at American Security Mortgage Corp.
The question people should be asking is at what rate threshold will sellers come back into the market. Given the average mortgage rate is 3.7%, and considering the pent-up deferred sales pressure is growing each day, our view is that somewhere around 5.5% will be a key threshold to attract sellers in a way that brings supply-demand parity into closer balance.
— Jack Macdowell, chief investment officer at Palisades Group
The number will be different based on the goal of the customer. If customers are looking for home improvement, debt consolidation or other spending goals, Home equity products can be positive at current rates. As rates work back towards 6%, I think you will begin to see more refinance options open up.
— Michael Merritt, SVP of customer care and default mortgage servicing at BOK Financial
Our definition of a magic number indicates the rate at which more than half of the buyers are willing to buy. We have an analytical department that analyzes the purchasing power of the U.S. in the past 40 years and they are saying it’s 6.25%. At 6.25%, a majority of people would say, ‘I’m OK to buy.’ That’s when supply and demand will equalize and your property is not going to drop or rise in value.
Buying a home in the U.S. often involves weighing the trade-offs between a 15-year and 30-year mortgage. With the interest rate staying constant, the first option has higher monthly payments, but the loan is repaid sooner than it is with the second option that offers lower monthly payments.
But home loan borrowers in the U.K., Canada, Australia and most European countries have a wider array of choices: They can break up their loan tenure into smaller chunks of two, three, or five years, and get lower interest rates as their loan size reduces and credit rating improves over time.
A new research paper by Wharton finance professor Lu Liu, titled “The Demand for Long-Term Mortgage Contracts and the Role of Collateral,” focuses on the U.K. housing market to explain the choices in mortgage fixed-rate lengths by mortgage borrowers. She pointed out that the length over which mortgage rates stay fixed is an important dimension of how households choose their mortgage contracts, but that has “not been studied explicitly thus far.” Her paper aims to fill that gap.
Liu explained that the U.K. market is “an ideal laboratory” for the study for three reasons: It offers borrowers an array of mortgage length choices; it is a large mortgage market with relatively risky mortgage loans similar to the U.S.; and it offers the opportunity to study market pricing of credit risk in mortgages. In the U.S. market, the pricing of credit risk is distorted as the government-backed Fannie Mae and Freddie Mac provide protection against defaults. “The U.S. is a big outlier in mortgage structure. It has essentially removed credit risk in the markets for long-term contracts.”
How Beneficial Are Long-term Mortgages?
At first sight, long-term mortgage contracts may seem preferable because they have a fixed interest rate, and thus allow borrowers to protect themselves from future rate spikes, the paper noted. “Locking in rates for longer protects households from the risk of repricing, in particular having to refinance and reprice when aggregate interest rates have risen,” Liu said. “In order to insure against such risks, risk-averse households should prefer a longer-term mortgage contract to the alternative of rolling over two short-term mortgage contracts, provided that they have the same expected cost.”
But in studying the U.K. housing market, Liu found that there is an opposing force that may lead some households to choose less protection against interest rate risk. This has to do with how the decline of credit risk over time affects the credit spreads borrowers pay. She explained how that occurs: As a loan gets repaid over time, the loan-to-value (LTV) ratio decreases as households repay the loan balance and house prices appreciate, the paper noted. This reduces the credit spread that households pay on their mortgage over time. When high-LTV borrowers decide to lock in their current rate, the credit spread will account for a large portion of that rate.
“[30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in.” – Lu Liu
As the LTV ratio declines and collateral coverage improves over time, they raise the opportunity cost of longer-term contracts, in particular for high-LTV borrowers, Liu noted. “Locking in current mortgage rates [protects] households against future repricing, but it also locks in the current credit spread, leading households to miss out on credit spread declines over time.”
High-LTV borrowers, or those who opt for low down payments and bigger loans, have to initially pay large credit spreads that can be as high as 220 basis points higher than what a borrower with prime-grade credit would pay. But refinancing with shorter-term contracts allows them to reduce those credit spreads over time. “They’re not locking in to a rate over 30 years; they’re probably locking in at shorter terms of two, three, or five years, and they do it maybe six or seven times,” Liu said. Riskier borrowers with higher LTV ratios hence face a trade-off, as locking in rates while the LTV is high is relatively costly, so they end up choosing shorter-term contracts, meaning they choose less interest-rate protection than less risky borrowers.
“In markets where the credit risk is priced using market prices – without government intervention as in the U.S. — the credit risk is expensive as lenders charge relatively higher rates for that,” Liu said. “If I’m a risky borrower, I face this very difficult trade-off: I want to insure myself like everyone else. But it also means that I’m locking in relatively high rates, with a big credit spread.” That of course does not always make sense for borrowers, she pointed out. “This may help explain why very long-term mortgage contracts with high-LTV mortgage lending are rare across countries.”
Liu said her data, which covered the period from 2013 to 2017, showed that the propensity is lower among riskier borrowers to opt for a 5-year fixed-rate mortgage compared to a 2-year fixed-rate mortgage. The higher the loan-to-value ratio, the lesser was their incentive to choose longer mortgage tenures, her research found. “Borrowers at 95% LTV are less than half as likely to take out a 5-year fixed-rate contract, compared to borrowers at 70% LTV,” the paper stated. The findings help explain the “reduced and heterogeneous demand for long-term mortgage contracts.”
How to Make U.S. Mortgages More Efficient
Liu said the findings in her paper are relevant for mortgage market design. “High-LTV borrowers face a difficult trade-off between their demand to lock in overall interest rate levels, and an expected decline in credit spreads over time,” she said. “Households could benefit substantially from being able to lock in base interest rates, while repricing their credit spreads.”
The findings are important also from both a monetary policy and financial stability perspective, Liu continued. “High-LTV borrowers are more exposed to interest rate risk, which can also cause vulnerabilities in a rising rate environment, since these borrowers may be most affected by mortgage cost increases.”
“There is political resistance to institutional change and borrower resistance to novel mortgage products.” – Lu Liu
The findings of Liu’s research are also timely, given the recent spike in the inflation rate. She noted that the U.S. Federal Reserve has increased interest rates more aggressively than its counterparts in the U.K., Canada, and Australia. All those countries have varying degrees of short-term fixed or variable-rate mortgages. Unlike in those countries, U.S. mortgage borrowers are “relatively shielded from interest rate rises, as the vast majority of households have locked in previous low rates for 30 years,” she noted.
Unintended Consequences of Long-term Mortgage Contracts
But the design of mortgage contracts in the U.S. creates disruptions beyond the housing markets to the broader financial system. “The 30-year fixed-rate mortgages in the U.S. have led to duration mismatch and financial stability risks in the banking sector, as rate rises have reduced the market values of these loans and mortgage-backed securities,” Liu said. She cited the recent collapse of Silicon Valley Bank as a case in point, which was triggered by the fall in the valuation of its bond holdings in a rising interest rate environment. In the U.K., in contrast, banks typically hedge the 2-to 5-year fixed-rate legs of mortgages using swaps, with the remaining part of the contract having a variable rate and thus not causing duration mismatch for the banks.
Long-term contracts have other consequences, too. “The [30-year mortgages] have had knock-on effects on mobility and housing markets due to mortgage lock-in,” Liu continued. Mortgage lock-in occurs in a rising interest rate environment, where homeowners find it a losing proposition to refinance mortgages they had taken out when interest rates were at historical lows. As a result, “people aren’t moving, and the housing market is frozen,” she said.
Liu said policy makers ought to rethink the 30-year fixed-rate mortgage, noting that Harvard economics professor John Y. Campbell had proposed that in a presentation at the Georgia Tech-Atlanta Fed Household Finance Conference in March 2023.
That said, the nature of mortgage systems in different countries is “highly persistent over time,” so any recommendation to radically change them might be far-fetched, Liu noted. “There is political resistance to institutional change and borrower resistance to novel mortgage products,” she added. If the U.S. were to move in the direction of more of a Canadian system that has mortgage rates fixed for five years, she noted, “any implementation of shorter-term fixed-rate contracts would need to take into account the credit risk dimension, which could result in risky households insuring less against interest rate risk.” Such a move has the potential to make monetary policy more effective and the banking system more stable, but further research is needed, she added.
Other indices showed significantly higher mortgage rates this week.
HousingWire’s Mortgage Rates Center showed Optimal Blue’s 30-year fixed rate for conventional loans at 7.43% on Wednesday, compared to 7.22% the previous week. At Mortgage News Daily on Wednesday, the 30-year fixed rate for conventional loans was 7.65%, up from 7.33% the previous week.
“With the explosion of the bond market, the strength of the U.S. dollar, the positive jobless claim data combined with the Fed’s hawkish tone, 10-year yields just shot up and mortgage rates followed,” HousingWire’s Logan Mohtashami said.
On Thursday, the 10-year yield reached 4.61%, the highest level since 2007.
Home sales transactions will decline this fall
In August, sales of existing homes and new homes were down, as were pending home sales, which suggests conditions will remain slow for the next quarter. Additionally, new home prices also declined, signaling that August may be the beginning of the end of this resilient housing market, according to Bright MLS Chief Economist Lisa Sturtevant.
“For many would-be homebuyers, a mortgage rate above 7% simply means that the numbers do not work for them,” Sturtevant said in a statement. “The 7% threshold, above which mortgage rates have been now for seven weeks, according to Freddie Mac, is a psychological, as well as a financial, barrier for consumers. Consumer confidence has started to stumble as individuals and households are becoming more anxious about the economy.”
Consumers are growing more cautious amid rising economic uncertainty, Sturtevant added.
Meanwhile, sellers are also refraining from listing their homes, adding pressure to an already depleted housing inventory. The absence of uptick in homes listed also means that there might not be any major price drops in the foreseeable future.
“Rates over 7% and low for-sale inventory continue to create affordability challenges for prospective buyers, Mortgage Bankers Association President and CEO Bob Broeksmit said in a statement. “Until rates start to come back down, we anticipate housing market activity will remain slow.”
UK ‘mortgage meltdown’ looms amid ‘terrifying’ growth in arrears
Jump in borrowers unable to make payments with landlords particularly hit and ‘worse to come’
Analysis: will the Bank listen to business and halt rate rises?
Mortgage balances with arrears jumped by 13% in the second quarter of the year to the highest level since 2016, according to Bank of England figures that underscore the stress in the UK mortgage market.
Rising interest rates and unemployment over recent months have put pressure on household disposable incomes, forcing some families to cut or suspend their monthly mortgage payments.
Buy-to-let mortgage payers have also come under pressure in parts of the country where tenants are struggling with the cost of living crisis.
The Bank of England said the total value of mortgage balances which had some arrears rose to £16.9bn, up by 29% on the previous year and the highest since the third quarter of 2016.
Mortgage arrears are based on figures showing the number of borrowers failing to make payments equivalent to at least 1.5% of the outstanding mortgage balance or where the property is in possession.
Mortgage lending was also hit in the second quarter with gross advances falling by £6.3bn to £52.4bn. Year on year, mortgage lending slumped by almost a third, to the lowest level since the worst of the Covid-19 collapse in lending in the second quarter of 2020.
Lewis Shaw, founder of Mansfield-based Shaw Financial Services, told the news agency Newspage a “mortgage meltdown” is approaching, unless the Bank of England changes its approach.
Shaw said: “The speed at which mortgage arrears are increasing is terrifying and should give cause to pause at the next Bank of England interest rate meeting. This is dire data, and we know that it’s about to get an awful lot worse with 1.6m mortgage holders due to renew over the next 12 months at significantly higher rates than anyone has been used to for well over a decade.”
Simon Gammon, managing partner at the finance arm of estate agents Knight Frank, said the proportion of mortgage payers falling behind with payments remained low at just 1%, despite the “sizeable jump in arrears”.
He said: “That’s because the vast majority of outstanding mortgages were issued under the post-global financial crisis regime, which was much more stringent when it comes to affordability.”
However, while homeowners were more likely to make cuts to other spending before falling behind with mortgage payments, buy-to-let landlords may take a different view, he said.
“We are more likely to see arrears in the buy-to-let sector, where landlords face a unique set of challenges. If a landlord finds their mortgage is no longer affordable, or the rent no longer covers their outgoings, they only have two choices – sell or default. If they opt to sell, they may have to wait up to a year for the tenancy to end, unless they are willing to sell with a tenancy in place, which is more difficult.
“Landlords are also more likely to opt to default than those struggling with a mortgage secured against their main residence, so this is an area to watch,” he added.
Incoming Bank of England deputy governor Sarah Breeden said she agreed with her future colleagues on the monetary policy committee (MPC), which sets UK interest rates, that inflation may fall at a slower pace next year than expected, forcing the central bank to keep the cost of borrowing higher for longer than expected.
Breeden, who will replace Jon Cunliffe as the Bank’s deputy governor for financial stability after the MPC’s meeting next week, said there was also a risk that growth and unemployment will worsen.
“I will, after November, be very careful in balancing those two factors: the risk of inflation becoming embedded through more persistent, second-round effects, as well as the impact of tightening coming through,” she told parliament’s Treasury Committee in a hearing convened to approve to her appointment.
“The challenge right now is that wages are high and rising and there is a real risk that second-round effects means that this inflation becomes embedded,” she said, adding that in keeping a lid on inflation, “it is not our intention to cause a recession”.
The MPC is expected to raise interest rates by a quarter point to 5.5% on 21 September, raising the average mortgage payments by £3,000 a year for a household that refinances a 2-year fixed product.
Breeden said she expected inflation to be “around the [Bank of England’s] 2% target in two years’ time”.
New Mortgage Charter to support residential mortgage customers
In light of the current pressures on households from inflation and interest rate rises, and following the commitments agreed to support mortgage loan borrowers in December 2022, on 23 June 2023 HM Treasury announced that it had agreed new support measures for mortgage holders with the FCA and the UK’s principal mortgage lenders (covering over 75% of the market). For more on the December 2022 commitments, take a look at our Engage article ‘UK FCA consults on mortgage support guidance as cost of living starts to bite borrowers’.
According to the Chancellor, Jeremy Hunt, there were two groups of people that the government was particularly worried about: (1) people who are at real risk of losing their homes because they fall behind in their mortgage payments; and (2) people whose fixed rate mortgage is coming to an end, who are concerned about the impact on their family finances of higher mortgage rates.
The Mortgage Charter policy document, which was published by HM Treasury on 26 June 2023, contains more details of the set of standards that lenders will adopt when helping their regulated residential mortgage loan borrowers worried about higher rates. Key points include:
Anyone worried about their mortgage repayments can contact their lender for help and guidance, without any impact on their credit file, and they are encouraged to contact their bank who are there to help.
Support for mortgage loan customers who are up-to-date with payments (representing 97% of the mortgage market) to switch to a new mortgage deal at the end of their existing fixed rate deal without another affordability check.
Lenders will provide well-timed information to help customers plan ahead should their current rate be due to end.
Lenders will offer tailored support for anyone struggling and will deploy highly trained staff to help mortgage loan customers. This could mean extending their term to reduce their payments, offering a switch to interest only payments, but also a range of other options like a temporary payment deferral or part interest-part repayment. The right option will depend on the mortgage loan customer’s circumstances.
Mortgage loan borrowers will not be forced to leave their home without their consent unless in exceptional circumstances, in less than a year from their first missed payment.
Customers approaching the end of a fixed rate deal will have the chance to lock in a deal up to six months ahead. They will also be able to manage their new deal and request a better like for like deal with their lender right up until their new term starts, if one is available.
There is a new deal between lenders, the FCA and the government permitting customers who are up to date with their payments to:
switch to interest-only payments for six months; or
extend their mortgage term to reduce their monthly payments and give customers the option to revert to their original term within 6 months by contacting their lender.
Customers who are currently in arrears should continue to work with their lender for the support that they need.
The commitments in the Charter do not apply to buy-to-let mortgages.
The PRA has confirmed that the measures agreed in the Mortgage Charter are not expected to lead to an immediate or automatic increase in capital requirements for banks, depending on the circumstances.
Changes to MCOB responsible lending, affordability and disclosure requirements to implement the Mortgage Charter
The FCA subsequently published a policy statement (PS23/8) and The Mortgage Affordability Rules (Amendment) Instrument 2023 containing enabling provisions for the Mortgage Charter. All changes came into effect on 30 June 2023. In summary, the FCA:
amended the responsible lending rules in MCOB 11.6 to enable mortgage lenders to meet their commitments under the Mortgage Charter. The changes are aimed at securing an appropriate degree of consumer protection by enabling lenders to offer customers swift, temporary reductions in payments and for customers to make an informed choice on their options; and
provided limited exemptions from its affordability requirements, enabling lenders to allow mortgage loan borrowers (except for second charge and bridging loan customers) to:
reduce their capital repayments (including to zero and paying interest only) for up to six months; and/or
fully or partly reverse a term extension within six months of it taking effect.
Both options can be offered without a new affordability assessment by lenders. However, mortgage lenders will still need to assess affordability if a mortgage loan borrower wants to permanently convert their mortgage to an interest-only mortgage or extend the mortgage term beyond their expected retirement date.
On 24 July, the FCA announced that it was introducing temporary regulatory forbearance on MCOB 7.6.28R. This will allow firms time to bring their systems into compliance where they are currently unable to provide the disclosure required under MCOB 7.6.28R, when giving effect to the new options under MCOB 11.6.3(3)(a) and (b)). The FCA recommends that where a firm cannot fulfil the disclosure requirement it should provide as much of the required disclosure as possible, in a durable medium, and expects mortgage lenders to have introduced a compliant approach as soon as possible, and in any event by the end of January 2024.
On-going FCA consultation on changes to create stronger framework to support mortgage loan borrowers in financial difficulty
The FCA also consulted on incorporating aspects of the Tailored Support Guidance (TSG) introduced during the COVID-19 pandemic into its Consumer Credit (CONC) and Mortgages (MCOB) sourcebooks, as well as proposals for targeted additional changes to support consumers in financial difficulty. The consultation closed on 13 July 2023. See our Engage article ‘UK FCA consults on changes to create stronger framework to support borrowers in financial difficulty’ for more on those proposals.
What will be the impact on securitisation transactions?
Participating mortgage lenders, led by UK Finance, have launched a communications campaign ensuring mortgage loan borrowers know what to expect when they contact their lender. This has so far resulted in more widespread uptake in the support than was the case with previous consumer support schemes. Parties on both the funder / investor and originator side of mortgage-backed securitisations should therefore by this point be aware of the potential impacts on the risk profile of any given pool of residential] mortgage loan receivables. These adjustments will need to be considered when drafting securitisation transaction documents and prospectuses, but also in relation to existing deals.
Eligibility criteria are typically used to determine which mortgage loans can be sold into a residential mortgage-backed securitisation. Consideration will need to be given to whether the newly-permitted relief measures will, if granted by the relevant mortgage lender in respect of a mortgage loan, result in a breach of the relevant eligibility criteria and therefore disqualify that mortgage loan for purposes of calculating a borrowing base for the transaction. For example, some transactions include an eligibility criterion that no matter existed at the time a particular mortgage loan was advanced which would enable the mortgage loan borrower to withhold or delay any payments under the mortgage loan. If a mortgage lender signs up to the Mortgage Charter and therefore offers customers the option to switch to interest-only payments for six months (reducing capital payments), it may become in breach of this eligibility criterion, unless a particular carve out is included, or waiver requested, in this respect. The
Transaction documents also often contain concentration limits concerning the number of interest-only mortgage loans that can be contained in a particular mortgage loan portfolio. If mortgage loan borrowers switch to interest-only payments for six months in accordance with the Mortgage Charter, this eligibility criterion may also be breached, resulting in a change to the borrowing base. A key point to consider in this respect is whether and how interest-only mortgage loans are defined in the transaction documents. If they are defined as mortgages for which the current regular payments made by the mortgage loan borrower cover interest only, then the mortgages could breach such criteria if interest-only payments are newly offered under the Mortgage Charter. However in the event that the transaction documents do not define an interest-only mortgage, the FCA handbook provides a definition: “a regulated mortgage contract other than a repayment mortgage”, with a repayment mortgage defined as one “under which the customer is obliged to make payments of interest and capital which are designed to repay the mortgage in full over the stated term”. Under this definition, repayment mortgages placed on six-month interest-only payment plans would not qualify as interest-only mortgages, as these mortgages will still be repaid in full over the stated term.
Facility agreements may also classify mortgage loans as ineligible, defaulted or delinquent if their term is extended. The amendments to MCOB relaxing the affordability requirements will make it easier for mortgage loan borrowers whose lenders have signed up to the Mortgage Charter to extend their mortgage term to reduce their monthly payments and then revert back to their original term. The ratios of mortgage loans classed as ineligible within the portfolio as a result of such extensions could therefore be affected at relatively short notice, again depending on the drafting and whether any carve out is included or waiver requested.
Servicers will also need to take the Mortgage Charter into account when carrying out their obligations under their servicing agreements. The drafting of the servicer standard of care in servicing agreements will be important in this respect. Servicing agreements typically state that the servicer should manage the mortgage loans to the standard of a well-informed and prudent mortgage lender, abiding by good industry practice. As at 28 July 2023, the Government’s policy paper stated that approximately 90% of lenders in the mortgage market had signed up to the Mortgage Charter. Whilst the Mortgage Charter is not binding legislation, and servicers typically act for the issuer rather than the original mortgage lender, this rate of take-up amongst mortgage lenders is likely to result in changes to good industry practices, in order to be in compliance with their servicing standard, including offering the forms of relief enabled by the above amendments to MCOB, which servicers will arguably be required to abide by.
The Mortgage Charter itself also sets certain standards of support to be provided by mortgage lenders to mortgage loan borrowers, such as the provision of well-timed information to help customers plan ahead should their current rate be due to end. Whilst the provisions of the Mortgage Charter are not enforceable legislation, these standards overlap with the new FCA Consumer Duty, which came into effect on 31 July 2023. As firms carrying out regulated and ancillary activities, mortgage servicers should be aware of their duties to mortgage loan borrowers under the new Consumer Duty legislation. In particular, they must have regard for both the consumer understanding and consumer support outcomes, and this will arguably include taking into account the recommendations of the Mortgage Charter. For further information on other measures introduced by the UK government to ensure consumers are being treated fairly and help those struggling to make payments, please see our Engage article ‘UK cost-of-living crisis: new Government/FCA measures to help consumers with savings and mortgages’.
On public deals, risk factors may also need to be updated (potentially via a supplementary prospectus) in order to provide details of the measures introduced, to confirm whether the originator is a signatory to the Mortgage Charter and to highlight that any further changes brought in by the FCA or UK government to assist consumers with cost-of-living pressures could affect the performance of the underlying portfolio.
Next steps
The lender signatories to the Mortgage Charter, UK Finance and the FCA committed to implementing it in full at pace, hence the FCA’s introduction of the above changes to MCOB without consultation. The FCA will review the impact of the changes within 12 months of publication, so by the end of June 2024. The FCA is also planning to update its March 2023 finalised guidance for firms supporting their existing mortgage borrowers impacted by the rising cost of living (FG23/2) as soon as possible in light of the changes.
The FCA’s Consumer Duty entry into force on 31 July 2023 also enabled the FCA to support implementation of the Charter by its signatories.
Securitisation market participants should therefore also monitor further publications by the FCA and UK government in case additional forbearance measures are extended to any other consumer asset classes such as credit cards, as was the case during the Covid-19 crisis.